Fed’s Musalem Warns: Monetary Policy Must Proceed With Caution

The President of the Federal Reserve Bank of St. Louis, Alberto Musalem, delivered a measured outlook on the U.S. economy and monetary policy during a recent forum in Indiana. He emphasized that current policy is closer to neutral than restrictive, while highlighting the resilience of the economy despite ongoing challenges.

Musalem noted that business investment outside of data centers remains subdued, with companies still learning how to navigate uncertainty. He stressed the importance of restoring reliable official data to ensure integrity in policymaking, while assuring that the Fed is not “flying blind” and maintains a reasonable picture of economic conditions.

Artificial intelligence, he observed, is contributing to productivity gains but also displacing certain jobs. However, he expressed skepticism that most recent layoffs are driven by AI, suggesting instead that traditional automation is the more likely factor.

On the labor market, Musalem expects employment to remain near full capacity, though softening slightly toward 4.5%. He anticipates weakness in the fourth quarter, followed by a rebound in the first quarter of next year, with growth potentially reaching or exceeding its long-term potential. Financial conditions remain highly accommodative, and deregulation continues to provide support.

Looking ahead, Musalem projected that the impact of tariffs will fade by the second half of next year, while inflation could begin to decline over the same period—provided monetary policy remains appropriately calibrated. He acknowledged that rate cuts have so far helped protect the labor market, but warned that there is limited room to ease further without risking excessive accommodation.

His message was clear: while the economy shows resilience, the Federal Reserve must continue leaning against inflation and proceed with caution in its next steps.